NEW YORK – Attractive muni bond valuations are helping the tax-exempt market maintain a degree of stability Friday morning but trading is slow and participants are spooked by the ongoing debacle on Capitol Hill.
Municipal Market Data’s triple-A scale shows munis maturing beyond 2017 are improving one or two basis points in early morning.
The improvement is stemming from a flight to quality in Treasuries, where the benchmark 10-year yield is down a whopping eight basis points at 2.88%. The two-year yield is down four basis points at 0.38% and the 30-year yield is six basis points firmer at 4.20%.
The 10-year muni-Treasury ratio rose as high as 94% in early trading, compared with 86.3% on July 1.
“We are seeing bids firming but have yet to see evidence of a market ready to reach,” said MMD analyst Randy Smolik.
A trader in Dallas said the MMD scale isn’t capturing how illiquid the market is.
He said the 177 Aaa-rated public finance issuers that are now on review for downgrade, as published by Moody’s Investors Service Thursday, has scared some traders.
“When you print the list off and look at it, it all of a sudden hits home,” he said.
The review involves $69 billion of debt from 162 local governments, 14 housing finance programs, and one university.
The trader said previous actions by Moody’s, like placing pre-refunded munis on notice for possible downgrade, was anticipated; but seeing the best local credits on similar review is chilling.
“If you’re a trader and you’re long a block of Dallas GOs, you must figure your bonds are now worth last than they were,” he said. “It creates so many problems in a market that’s already thinly traded.”
He assumes that lower-rated credits not in the report are all worth less now too. “The city of Forth Worth, for example, it will be worth less – the whole thing will be worth less.”
Meantime, the Dow Jones Industrial Average fell 94 points, or 0.77%, in the first hour of trading, subtracting further after five days of consecutive losses.
The culprit was weak fresh economic data showing Second-quarter GDP growth rose just 1.3% on an annualized basis, while revisions slashed first-quarter growth to just 0.4% from a previous estimate of 1.9%.
“In Q2, personal consumption hardly rose (0.1%), and the weakness was not solely in the auto space where a shortage of cars delayed demand,” said Sal Guatieri at BMO Capital Markets, who noted spending on non-durables was virtually flat and demand for services remained soft at 0.8%.
“Despite some rebound in federal defense spending, deep cutbacks at the state and local levels spurred a 1.1% drop in government spending, the third decline in a row and a taste of what’s ahead,” he added.
The Chicago Business Barometer, a measure of services and manufacturing in the Midwest, missed forecasts too as it declined to 58.8 in July from 61.1 in June.
